Fundraising is one of the most heavily scrutinized acts for charities by the Canada Revenue Agency (CRA), and charities can lose their registration if they fail to comply with acceptable fundraising practices. The CRA interprets 'fundraising' broadly to include the solicitation of donations of cash or gifts in kind, or the sale of goods or services to raise funds. In practice, this includes planning, researching, or preparing to ask for support, along with related activities such as profile raising, donor stewardship, and donor recognition.
Below are some important tips for how charities can ensure they raise the funds they need without overstepping the boundaries of their charitable goals and thus risking an investigation or worse from the CRA. For more information from the CRA on fundraising practices for charities, please see here.
Tip #1: Avoid any deceptive practices
This seems like a very simple rule to follow, but the CRA takes very seriously any fundraising claims made by charities that it determines is not entirely truthful, accurate, complete and timely. For example, some charities will claim that 100% of the money they raise will go to charitable work. Well this may be true in some circumstances, in others there are some expenditures involved in the fundraising (see tip #4 below) that are funded by donations. In such instances, the CRA would see this 100% claim as deceptive and the CRA takes the position that the negative impact of deceptive fundraising practices outweighs the public benefit of the charitable work supported by a charity's fundraising.
Tip #2: Watch your use of merchandise or gifts
Purchasing merchandise or some other tangible benefit for fundraising is a common practice by charities looking to raise funds, who will then, in turn, provide the merchandise as a gift for donors. Merchandise such as calendars, clothing or photographs are common examples of such donor gifts. This practice is not on its face improper but the CRA will be concerned if there is evidence that the charity paid more than fair market value for fundraising merchandise, especially if the sourcing of this merchandise was not on arm's-length terms. Similarly, if the merchandise purchased has more than a nominal value, the charity will have to accurately assess its fair market value and deduct this amount from any tax receipt it issues to donors.
Tip #3: Keep remuneration of fundraisers reasonable
Like the use of merchandise or gifts, if the salary and benefits paid to staff for any fundraising position exceeds the fair market value of the services provided, this will also raise a red flag with the CRA. Charities will often hire outside parties to raise funds on their behalf and will pay them a portion of the funds raised. These arrangements tend to be heavily scrutinized, particularly if not well-documented or result in a windfall profit for the fundraiser. If third-party fundraisers are to be used, ensure this is disclosed to donors along with how these fundraisers are compensated.
Tip #4: Monitor your fundraising expense ratio
As a more general rule, a high fundraising expense ratio is often seen as an indicator that a charity may be engaged a prohibited fundraising activity and the higher a charity's fundraising ratio, the more likely it is that the CRA will seek additional justification for fundraising costs. The fundraising ratio is determined by dividing fundraising expenditures by fundraising revenue using the entries from the charity's Form T3010. Generally, a ratio of costs to revenue under 35 per cent is seen as unlikely to generate concerns but once charities go over this threshold it is more likely that the CRA will requested a detailed assessment of their expenditures, especially if this ratio is far exceeded
Tip #5: Be careful how much you actually raise
Finally, while raising more funds than a charity intends is a problem many would wish to have, the CRA does require an identified use or need for all funds raised by a registered charity. Accordingly, engaging in fundraising which may result in an unjustified level of reserves may indicate a charity is engaging in prohibited fundraising activities. Similarly, if a registered charity has sufficient income to achieve its charitable purposes the CRA may question new fundraising activities. As such, a registered charity must be able to justify new fundraising activities and demonstrate it has considered the ability of current revenues to meet existing and reasonably projected organizational needs, and that it has specific plans for the additional funds to be raised.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
